“Learn the difference between connection and attachment. Connection gives you power. Attachment sucks the life out of you.” — source unknown

Today is brought to you by the word “co-sign.” Although not technically a four-letter-word, perhaps it should be. This is a term that is often used in the industry of lending. In general, it is an invitation to bring a second party on board to guarantee payment on a loan if the initial party applying for the loan is unable to pay. The irony is, the first person has already been determined as having a higher probability of nonpayment, thus requiring a second person to be brought on board. The second the pen is brought to paper, the connection becomes an attachment.

There are a variety of reasons why someone would need a co-signer for any type of loan. One common reason, especially for young adults just starting out, is the fact they simply haven’t had time to establish any credit. Without a track record of how a borrower handles credit, a lender is unlikely to take a risk. Another reason would be the primary borrower’s high debt-to-income ratio. There is also the possibility of unsteady income or poor credit. All great reasons to need a co-signer. Also, all great reasons to not be a co-signer.

Hang with me here. I’m just tuning into my logical mind, without regard to my emotional one. I get it. When my middle daughter, the brave, yet filterless one, asked me to co-sign on a car loan with her, it did give me pause. After all, she works hard, she makes decent money, she’s always paid me back when I have loaned her small amounts of money in the past, what would really be the risk? However, after about 2.3 seconds of “pausing,” I responded with a resounding “nope.” I did, however, thank her for asking.

“I knew you would say that,” she replied. “I’ll just ask my dad.” It really shouldn’t have come as a surprise to her. I have preached from the pulpit about the value of making it on their own. They know it as lecture No. 417, section 2.1., and they all have it easily memorized by now. Although she may have wanted it to sound like a threat to ask her dad, I suspect we’re on the same page about this.

Sometimes, bringing on a co-signer works out great for all parties. However, according to one Federal Trade Commission study, a full 75% of co-signers end up paying at least part of the debts they “co” signed on. I suspect that some co-signers are fully aware that this may be the case before even putting pen to paper.

Some, however, don’t understand the full ramifications. A couple of days ago, we closed on the sale of a home that was purchased several years previously with the help of a co-signer. This was not a parent, a spouse or even a significant other, it was just a buddy. This was not her buddy, either; it was her soon-to-be ex-husband’s buddy. The couple were divorcing and were ordered to sell the home and split the proceeds, not between the signer and co-signer, but between the signer and estranged husband. Meantime, the co-signer had not been able to purchase a home for his own family because his credit was tied up in someone else’s family home.

After I had spoken with all parties and all parties were in agreement as to how to move forward, we got the home under contract and proceeded to the closing table. Meanwhile, the escrow officer wanted to know who is going to pay the judgement from the furniture company that is attached to the co-signer’s name and now to the property. This is something that must be paid before the title can transfer. Since it is neither of the party’s responsibility who is splitting the proceeds, neither party felt they should pay it. It was no small amount either.

One thing is clear: This was not what this gentleman had visualized when he co-signed on this loan. One of the documents that is required by a lender to pass to a co-signer is from the FTC and in part reads:

“Notice to Cosigner. … You are being asked to guarantee this debt. Think carefully before you do. If the borrower doesn’t pay the debt, you will have to.” In other words, “attachment can suck the life out of you.”

Jen Fischer is an associate broker and Realtor. She can be reached at 801-645-2134 or jen@jen-fischer.com.

Newsletter